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Big rebound in oil prices in 2015 looks unlikely

Dec 23, 2014 at 4:43 pm in Market Commentary by contrarianuk

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Comments yesterday from Saudi Arabia’s oil minister Ali al-Naimi that the kingdom was determined to maintain market share and would not cut production, even if the price of crude fell even further, makes it likely that oil prices will not rebound strongly from the current $60 level in 2015, without a major geopolitical event. He said, “Whether it goes down to $20, $40, $50, $60, it is irrelevant,”. He confirmed that the focus of OPEC was defending its position in the market rather than achieving a certain price. ‘As a policy for Opec, and I convinced Opec of this, even Mr al-Badri (the Opec Secretary General) is now convinced, it is not in the interest of Opec producers to cut their production, whatever the price is’.

He also blamed non-OPEC countries for flooding the market with oil, ‘The kingdom of Saudi Arabia and other countries sought to bring back balance to the market, but the lack of co-operation from other producers outside Opec and the spread of misleading information and speculation led to the continuation of the drop in prices’. He also said ‘If they want to cut production they are welcome, we are not going to cut, certainly Saudi Arabia is not going to cut’. ‘Opec is not a swing producer’ and ‘it’s not fair that we correct the market for everyone else.’

So it looks like Saudi Arabia and the UEA are aiming to play chicken with the likes of Russia, the US and Brazil in the war to maintain market share. As a result a return to an oil price in excess of $80 is not going to happen any time soon in this environment.  Lower prices will ultimately help cut excess supplies from more expensive oilfields and rebalance supply and demand thereby eventually raising prices in the longer term – but this effect could take a while. For example, non-conventional drilling in the United States isn’t going to stop overnight, nor are deep-water fields in areas like off-shore Brazil going to shut down after billions of dollars of investment. OPEC’s determination not to control the price of oil through production is a big change in the way the cartel has operated and underlines the determination of the lower cost producers in the organisation to control the agenda.

Contrarian Investor UK

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